Category: Market Action

DBRS has commented on the proposed BAM restructuring:

According to DBRS Morningstar’s analysis, with a reduction of 25% in the FFO from the AMB, the Restructuring is expected to have a modestly negative impact on BAM’s credit metrics such as the FFO-to-debt and cash flow-to-debt ratios. However, DBRS Morningstar views the impact as manageable because BAM’s credit metrics are currently strong for the ratings. Moreover, the metrics will remain supported by growing fee-bearing capital and the incremental FFO from Real Estate as a result of last year’s acquisition of the 38% interest in Brookfield Property Partners LP that BAM did not already own. From a business risk profile perspective, the Restructuring is expected to only have a modestly negative impact on BAM’s risk profile as the relative importance of the asset management business, which is viewed as being of higher credit quality relative to BAM’s other business pillars, will decline somewhat. However, DBRS Morningstar notes that the other major business pillars (such as Real Estate, Renewable, Infrastructure, and Private Equity) continue to benefit from sound fundamentals, providing superior business diversification to BAM. Furthermore, the reduction in the AMB FFO only partially offset the significant increases in AUM and fee-bearing capital in recent years.

DBRS Morningstar believes if the Restructuring is implemented as currently planned, there will be no rating impact on BAM and its guaranteed subsidiaries. However, DBRS Morningstar could take a negative rating action if (1) the Company’s credit metrics weaken materially from the level as required by DBRS Morningstar on a sustained basis; or (2) its business risk profile post Restructuring deteriorates significantly. DBRS Morningstar currently considers these scenarios unlikely.

TXPR closed at 622.93, up 0.90% on the day. Volume today was 1.26-million, third-lowest of the past 21 trading days.

CPD closed at 12.40, up 0.90% on the day. Volume was 92,050, ahead of only May 12 in the past 21 trading days.

ZPR closed at 10.36 up 1.07% on the day. Volume of 165,670 was below the median of the past 21 trading days.

Five-year Canada yields were up to 2.80% today.

TXPR closed at 617.40, down 0.67% on the day. Volume today was 1.28-million, third-lowest of the past 21 trading days.

CPD closed at 12.29, up 0.08% on the day. Volume was 87,210, lowest of the past 21 trading days.

ZPR closed at 10.245 down 0.53% on the day. Volume of 440,140 was third-highest of the past 21 trading days.

Five-year Canada yields were down a bit to 2.75% today.

Brookfield Asset Management has announced:

In our year-end letter, we mentioned that we were considering publicly listing a partial interest in our asset management organization. We have been very encouraged by the feedback we received from shareholders and concluded that publicly listing a 25% interest in our asset management business will be overwhelmingly positive. We expect that these shares can be distributed to shareholders before year end. The distribution will be tax-free for Canadian and U.S. shareholders and we are working through the taxation in other jurisdictions.

This move will be credit-negative for BAM issues to some extent, since there will be structural subordination of the preferreds, which I assume will stay at the holding company level. I have not yet seen any credit agency commentary regarding this announcement.

The US Inflation Number came out today:

Energy prices fell 2.7 percent in April, driven by a decrease in the cost of gasoline, which fell 6.1 percent from March. But overall energy prices were still 30.3 percent higher than a year earlier, more than three times the rate of both overall inflation and so-called core inflation.
…
Prices of dairy, eggs and cereals soared in April, pushing up overall inflation as an outbreak of bird flu, the rising cost of fuel and fertilizer, labor shortages and other factors added to prices at restaurants and grocery stores.

The price of food rose 0.9 percent in April from the previous month, the 17th consecutive monthly increase, according to the Consumer Price Index compiled by the Bureau of Labor Statistics and released on Wednesday.

The increase was driven by a 2.5 percent increase in the price of dairy, a 2.0 percent increase in nonalcoholic beverages and a 10.3 percent increase in the cost of eggs, as avian flu decimated poultry flocks.

But prices of fruits and vegetables declined from the previous month, and the overall pace of rising prices for groceries cooled slightly in April, rising 1.0 percent after an increase of 1.5 percent the previous month.
…
The Consumer Price Index rose 8.3 percent in the year through April, a slight deceleration from March, when prices rose 8.5 percent, but still a bigger jump than economists had expected. The government’s report also showed core inflation — which strips out volatile food and gas prices — rose 0.6 percent in April from the previous month, faster than its 0.3 percent increase in March.

PerpetualDiscounts now yield 5.91%, equivalent to 7.68% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.86%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 280bp from the 275bp reported May 4.

The New York Fed released its Household Debt and Credit Report today:

The Quarterly Report on Household Debt and Credit for the first quarter of 2022 shows a solid increase in total household debt of $266 billion, to $15.84 trillion. Balances now stand $1.7 trillion higher than at the end of 2019, before the COVID-19 pandemic. Mortgage and auto loan balances rose by $250 billion and $11 billion, respectively, in the quarter, although originations for both subsided from historically high levels in 2021. Credit card balances declined by $15 billion, in line with seasonal trends typically seen at the start of the year, but are still $71 billion higher than in 2021:Q1, representing a substantial year-over-year increase.

TXPR closed at 618.14, down 1.14% on the day. Volume today was 1.47-million, well below the median of the past 21 trading days.

CPD closed at 12.28, down 0.97% on the day. Volume was 107,800, near the median of the past 21 trading days.

ZPR closed at 10.26 down 0.87% on the day. Volume of 173,220 was near the median of the past 21 trading days.

Five-year Canada yields were down a bit to 2.82% today.

It was a pretty horrible day everywhere:

The S&P 500 fell 3.2 percent, adding to a downdraft that has knocked 16.3 percent off the index this year, including a five-week stretch of selling that is the market’s longest such decline in more than a decade.

The drop has stocks approaching a bear market, Wall Street’s term for a decline of 20 percent or more from recent highs, a retreat that serves as a marker of a severe shift in sentiment.

The focus of attention on Monday was China’s economy, after customs data showed that growth in the country’s exports slowed significantly in April and Li Keqiang, the Chinese premier, warned this weekend that the current state of the nation’s jobs market was “complicated and grave.”

But here’s a sign of the times:

Royal Bank of Canada RY-T -1.44%decrease
is raising base pay by 3 per cent for its lower-paid employees as part of a $200-million spending package that aims to fend off fierce competition for talent by improving salaries and benefits.

The unusual increase takes effect on July 1, and applies to all employees in a range of entry-level and less senior positions, including at branches, call centres and other divisions. Collectively, the employees receiving raises make up nearly half of all RBC staff, and chief executive officer Dave McKay said in a company memo that the raises are intended “to address the market pressures and the rising cost of living that is having a greater impact on colleagues in lower salary bands.”

He said RBC, which has more than 85,000 full-time equivalent employees, will take those market forces into account when the bank calculates its normal salary increases at the end of the fiscal year in October. Many other RBC employees, including those in senior roles, receive a significant amount of their pay from commissions or bonuses, which also surged in a busy year for traders and investment bankers. That has been a key factor driving costs higher for many banks over the past year.

The New York Fed has released its Survey of Consumer Expectations:

• Median inflation expectations decreased in April at the one-year horizon to 6.3% from 6.6% in March. In contrast, median three-year-ahead inflation expectations rose by 0.2 percentage point to 3.9%. While both series remain elevated, they are 0.3 percentage point below their series highs. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at the one-year horizon but increased at the three-year horizon.
• …
• Expectations about year-ahead price changes fell sharply by 4.4 percentage points for the price of gas to 5.2%. The expected change in the price of food and medical care fell by 0.2 percentage point (to 9.4%) and by 0.1 percentage point (to 9.5%), respectively. The median expected change in the cost of a college education and rent rose by 0.6 percentage point (to 9.1%) and 0.1 percentage point (to 10.3%), respectively. The median expected increase in rent is now at a new series’ high.
• …
• Median one-year-ahead expected earnings growth remained unchanged in April at its series high of 3.0%.
• …
• The median expected growth in household income increased by 0.1 percentage point to 3.1% in April. This reading is comparable to its 12-month trailing average of 3.0%, but it is below the series high of 3.4% recorded in December 2021.
• Median household nominal spending growth expectations increased by 0.3 percentage point to 8.0%, marking a new series high. The increase was most pronounced for respondents over the age of 60 and those with at most a high school diploma.

There was a good jobs number in the US:

On Friday, the Labor Department reported that employers added 428,000 jobs in April, while average hourly earnings rose 5.5 percent from a year ago. While the report showed hiring remains resilient, economists have said that the strong job market and wage acceleration could incentivize the central bank to lift interest rates more aggressively.
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The central bank on Wednesday raised interest rates half a percentage point, the biggest increase since 2000. Speaking after the announcement, Jerome H. Powell, the Fed chair, cited the labor market, and in particular the record number of job openings relative to the number of unemployed workers, as a reason policymakers had become more aggressive in recent months.

“You can see that the labor market is out of balance; you can see that there is a labor shortage,” Mr. Powell said. In April, he described the labor market as “unsustainably hot.”
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The reaction to the jobs report was evident in the bond market too. The yield on 10-year Treasury notes, a proxy for investor expectations about interest rates, rose to 3.1 percent from 3 percent a day earlier.

Not so good in Canada:

Job creation in Canada slowed substantially in April and work absences due to COVID-19 spiked to near record levels, marking a subdued start to the second quarter but one that’s unlikely to divert the Bank of Canada from its quickest pace of policy tightening in decades.

The economy added 15,300 positions last month, Statistics Canada said Friday, short of the 40,000 jobs that financial analysts on Bay Street had expected. The unemployment rate fell to 5.2 per cent from 5.3 per cent, the lowest in nearly five decades of comparable data.

Hiring activity was closer to a typical month before the pandemic, following a blowout gain of roughly 409,000 positions in February and March combined as pandemic restrictions eased. It was the rare report of late that didn’t speak to sizzling growth in the Canadian economy.
…
Total hours worked – a metric that economists look to for an indication of economic output – fell 1.9 per cent in April from March, partly because of a spike in illness-related absences from work, Statscan said. Nearly one in 10 employees were absent from work due to illness or disability in April, making it one of the largest months of absence during the pandemic.
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Thus far, wage growth has been slow to pick up and doesn’t come close to matching inflation, amounting to a reduction in purchasing power for the average worker. In April, average hourly wages rose 3.3 per cent on an annual basis – similar to March’s 3.4-per-cent pace, but lagging growth in 2019, when the labour market was experiencing similarly tight conditions.

TXPR closed at 627.81, down 0.74% on the day. Volume today was 1.50-million, third-lowest of the past 21 trading days, ahead of only April 14 and April 18. We are still hanging around price levels experienced on April 25.

CPD closed at 12.48, down 0.48% on the day. Volume was 121,280, near the median of the past 21 trading days.

ZPR closed at 10.45 down 0.38% on the day. Volume of 302,360 was well above the median of the past 21 trading days.

Five-year Canada yields were up 10bp to 2.88% today.

It was a wild day for the markets:

Stocks dove on Thursday, erasing gains from their best day since 2020 in a swing that highlights Wall Street’s heightened anxiety over what the Federal Reserve’s campaign to slow inflation will mean for the economy.

The S&P 500 fell 3.6 percent, after surging 3 percent on Wednesday. The Nasdaq composite slid 5 percent, its biggest drop since June 2020.

The volatility was on display in other financial markets, too. Yields on government bonds spiked, with the rate on 10-year U.S. Treasury notes, a benchmark for borrowing costs across the economy, climbing above 3 percent and touching its highest level since 2018, reversing a drop on Wednesday.

TXPR closed at 632.49, up 0.52% on the day. Volume today was 2.39-million, about the median of the past 21 trading days. Today’s performance, the fifth consecutive gaining day, regains lost ground all the way back to April 25.

CPD closed at 12.54, up 0.53% on the day. Volume was 124,810, near the median of the past 21 trading days.

ZPR closed at 10.485 down 0.10% on the day. Volume of 163,920 was a little below the median of the past 21 trading days.

Five-year Canada yields were down to 2.78% today.

It is interesting to note that the three month bill yield has declined to 1.44%; I suspect it’s a flight to quality, but still indicates a strong conviction that we will see a 50bp hike at the beginning of June, with probably more to come in mid-July.

The FOMC hiked its policy rate 50bp:

Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in conjunction with this statement.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting.

This move has been so thoroughly discounted that the announcement was actually good for equities:

Stocks on Wall Street had their best day since 2020 on Wednesday, after Jerome H. Powell, the Federal Reserve chair, said that central bankers weren’t considering exceptionally large increases in interest rates, calming investors who had begun to worry that the fight against inflation might push the economy into a recession.

The S&P 500 rose 3 percent, the biggest jump since May 2020, spiking after Mr. Powell’s comment. Earlier on Wednesday, the Fed said it would lift interest rates by half a percentage point, an increase that was widely expected, and that it plans to shrink its bond holdings.

Bond yields, a proxy for investor expectations about interest rates, ticked lower. The yield on 10-year Treasury notes fell eight basis points, or 0.08 percentage points, to 2.92 percent.

PerpetualDiscounts now yield 5.83%, equivalent to 7.58% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.85%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has reverted to 275bp from the 320bp reported April 27.